Bond yields fall as fuel price cut fuels rate cut hopes

KARACHI: Pakistan Investment Bonds (PIBs) yields fell on Tuesday as investors bet on an early rate cut, after the government slashed fuel prices that could ease inflation pressures, analysts and traders said.

“In today's fixed bond PIB auction, the government raised Rs158 billion (Competitive & Non-Competitive) against the target of Rs190 billion and participation of Rs460 billion, whereas cut-off yields were down by 38-50 basis points (bps),” said brokerage Topline Securities.

The cut-off yield on three-year PIBs dropped by 40 basis points to 16.80 percent, while the yield on five-year paper fell by 38 basis points to 15.50 percent. The yield on 10-year paper also decreased by 50 basis points to 14.50 percent.

The government did not receive any bids for the 15, 20, and 30 year bonds. Analysts said the fuel prices saw a substantial reduction of Rs8 per liter, providing much-needed relief and positively impacting future inflation expectations.

A cut in interest rates in the upcoming statement is widely anticipated by the market, which is excitedly awaiting the monetary policy calendar. The State Bank of Pakistan held the policy rate steady at 22 percent on December 12.

The International Monetary Fund expects that inflation will stay high, however, by the end of June 2024, with suitably stringent policies in place, it could drop to 18.5 percent (earlier 16.2 percent), with an average inflation rate of 24 percent (earlier 26 percent) for FY24.

The SBP expects inflation to decline to 20-22 percent in FY24 from 29.2 percent in FY23. An analyst at Topline Securities expects inflation to be 17.5 percent by the end of June 2024, with an average inflation rate of 23 percent for FY24. Additionally, he anticipates a 700 bps cut in the policy rate in 2024, reaching 15 percent by December 2024.

Some analysts, however, do not agree that rates will be lowered any time soon because the SBP would wait to see the outcome of the next elections as well as the direct effects of the increases in gas and electricity prices along with their ripple effects.

Bloomberg in a report said the central bank is likely to start cutting the policy rate from March as the inflation slows down, and it is expected to slash a cumulative 700 basis points by the end of 2024.

Last month Bloomberg projected that average quarterly inflation in Pakistan would fall below 25 percent in the first quarter of 2024, below 15 percent in the second quarter of the same year, and around 10 percent by the fourth quarter of 2024.